Tagged: Yuan peg

The Obama administration plans to delay a decision on whether to label China a currency manipulator, a move long demanded by many U.S. lawmakers but also a potentially big wrench in an important relationship. A Senate aide told Reuters the Treasury Department would hold off releasing its semi-annual report on the currency practices of U.S. trading partners.

It was not immediately clear how long the delay would be. Industry sources had said they expected the report to be unveiled at 1 p.m. EDT (1700 GMT) on Friday. The Senate aide, speaking on condition he not be named, said he was "hearing they will delay its release."

A desire to look tough on "unfair" trade practices before the U.S. congressional election on Nov. 2, in which Democrats are battling to keep control of Congress, could tempt President Barack Obama to cite China for the first time in 16 years.

But concern about angering the largest holder of U.S. government debt and the need for Chinese support on a host of international issues could mean continuing diplomatic efforts that have resulted in a nearly 2.5 percent rise in the value of China’s yuan against the dollar in recent months. It is a fine line and many observers think Obama will opt to play it safe with Beijing and give it another pass.

The IMF has softened its criticism of China’s currency regime in recognition of Beijing’s efforts to free up its exchange rate but the move showed a split among the Fund’s member countries. A summary of an annual review of China’s policies described the yuan as "undervalued," a change from "substantially undervalued," which was used by International Monetary Fund chief Dominique Strauss-Kahn as recently as June. The yuan has been a flashpoint in relations between China and old-line industrial powers, some of whom have complained that an undervalued yuan undercuts their exports. Without elaborating, an IMF board statement on Wednesday said several countries on the 24-member executive board believed the Chinese currency was undervalued. But others said a structural reduction in the balance of payments surplus was already unfolding thanks to steps taken to boost consumption, disagreeing with an assessment by IMF staff that the yuan was "substantially undervalued." "This does reflect a softening in the board’s position about the degree of adjustment that is needed in the Chinese exchange rate regime," said Eswar Prasad, a senior fellow at Washington’s Brookings Institution and a former IMF official.

IMF economists calculated the yuan was undervalued somewhere between 5 and 27 percent, depending on methodologies used, Prasad said. A diplomat in Beijing confirmed the range. Beijing dropped the yuan’s 23-month-old peg to the dollar and reverted to a managed float on June 19, since which time it has inched up 0.7 percent against the dollar. Prasad said it was premature for some countries to argue China had made a significant move on its currency regime and was boosting local demand to help rebalance the world economy. Despite the choice of language used by the IMF’s board, the Fund’s mission chief to China, Nigel Chalk, said Fund staff economists found the renminbi remained "substantially below the level that is consistent with medium-term fundamentals." That view was based on staff forecasts that China’s current account surplus, which has fallen to around 4 percent of gross domestic product, will rise to about 8 percent in five years as the world economy recovers and net exports pick up again. Beijing disagreed, arguing the surplus will stay at the new, lower level, Chalk told reporters on a conference call. Among the constraints in assessing China’s economy was the lack of a medium-term policy framework, he said.

Now that China is staying true to its word and letting the yuan trade a bit more freely, analysts and investors outside the mainland may not be prepared for one potential outcome: a yuan drop. China is showing a determination to let the yuan be more volatile against the dollar within its daily 0.5 percent trading band and go with the market flow, contrary to some expectations for another steady rise as happened between 2005 and 2008. That means there are no guarantees that the yuan will appreciate against the dollar over time, and Beijing is set to stick firmly to its position on yuan flexibility no matter how much it disappoints critics — most prominently U.S. lawmakers. The fundamentals arguing for substantial yuan appreciation have changed since the financial crisis: China is running smaller trade surpluses, and economists see the potential for the shrinking current account surpluses to turn into deficits in coming years. As a result, the basis for steady but slow yuan appreciation versus the dollar is not as strong as five years ago — one reason why Beijing keeps emphasising flexibility in its pushing forward the reform of its currency system.

"China’s new yuan policy lays emphasis on a quick response to changes in economic and market conditions, with no preset levels for yuan appreciation either in the short term or long term," said Chen Lu, chief economist at Haitong Securities in Shanghai. The People’s Bank of China has matched its words with deeds by allowing greater yuan volatility since the June 19 announcement and subsequent clarification that flexibility still means that yuan moves must be gradual and controllable. The yuan has moved in an average daily range of more than 100 pips since its depegging, far above the 50 pips that dealers say would allow banks to engage in proprietary trading intraday. This compared with a daily movement of only a few pips during the two years when the currency was pegged to the dollar. Banks are just starting to do more day-to-day speculation, adding to liquidity in the local spot market. Before the depegging, the limited daily swings meant all trading was almost a pure reflection of supply and demand, with the PBOC keeping the market in check. Realised volatility in dollar/yuan has jumped as spot has started swinging more sharply within the daily trading band on the official CFETS platform.

Chinese President Hu Jintao has resisted pressure from President Obama to raise the value of the Chinese yuan. He told Mr Obama that it would "neither balance Sino-US trade nor solve the [US] unemployment problem", Chinese official news agency Xinhua reported. However, Mr Hu indicated that the Chinese were preparing to change their policy on the yuan in their own time. The Chinese and US presidents were meeting at the sidelines of a 47-nation nuclear summit in Washington DC. According to Xinhua, Mr Hu said that detailed measures for reform should be considered in the context of the world’s economic situation, as well as China’s. China News Service reported that Hu said China "is firmly committed to the direction of reforming the… exchange rate regime. This is based on the needs of China’s own economic development." However, he added that "outside pressures will not advance [reform]".

For his part, Mr Obama called on his counterpart to switch to a more "market oriented" exchange rate, according to senior White House official Jeff Bader. China has pegged its currency to the dollar since 2008 in response to market volatility during and after the financial crisis. Market reaction to the comments was fairly muted, but seemed to interpret Mr Hu’s comments as reducing the immediate prospects of any rise in the yuan’s value. Other Asian currencies such as the Malaysian ringgit and Korean won, lost between 0.5% to 1% against the dollar in early trading, ending strong rallies recorded during the past two months. Markets had previously been speculating that if the yuan were allowed to appreciate, this would lead to similar rises in the currencies of other Asian countries that compete with China for exports to the US and Europe.

China’s trade disputes with the US have been “amplified” and in some cases are no worse than those with other countries, US Trade Representative Ron Kirk said ahead of a visit to Washington this month by President Hu Jintao. Kirk declined to single out China as a protectionist nation in an interview on Bloomberg Television’s “Political Capital With Al Hunt” airing this weekend. The US and China, with $409 billion in annual trade, have a complex relationship that holds “great promise,” Kirk said. “Our challenges with China I think get amplified because there’s so much attention focused on China,” Kirk said. “But we have challenges throughout Asia.”

President Barack Obama would like to complete at least one of three pending trade agreements with Korea, Colombia and Panama this year, Kirk said. While he declined to say which accord would come first, Kirk said the administration is making “good progress” on resolving labor and tax issues with Panama. Bipartisan cooperation will be required on trade issues to keep the US competitive with other countries that are lowering tariffs, Kirk said. He has met with representatives of labor unions and congressional Democrats over the past 14 months to try to defuse the emotions surrounding trade, Kirk said.

Tire Tariffs

“We’re not going to be able to move forward if we have a poisoned political environment in Washington in which every issue that comes up becomes the next health care,” Kirk said. “If we do it right, we ought to be able to thread the needle in a way that we can answers some of their criticisms honestly but still

China’s currency is clearly undervalued, but pressure on Beijing to make its currency rise in value won’t trim the US trade deficit with China or reduce the jobless rate, say American economists. Political pressure is building on the Obama administration to name China a "currency manipulator" in a mid-April report, and lawmakers are threatening to slap tariffs on Chinese goods to offset any export subsidy a cheap currency gives China. However, many trade economists and businessmen say that at best, a heavy-handed US approach on currency will fail. At worst, it could backfire, sparking a US-China trade war. Instead, Washington should address the currency and other factors behind global financial imbalances in a multilateral setting. Bilaterally, the Americans should focus on Chinese trade barriers that suppress sales to China and may violate World Trade Organization (WTO) commitments, they say.

"The currency is undervalued, period. It’s also a structural distortion because the world’s second-largest economy shouldn’t be pegging to the largest economy," said Derek Scissors of the Heritage Foundation in Washington. Economists say China’s currency is pegged to the dollar at a rate that is between 15 and 40 percent lower than the level markets would set if the yuan were freely traded. Slamming the Chinese over currency is politically appealing in an election year in which US unemployment is near 10 percent and China’s trade surplus is expanding again.

JOBS AND TRADE

Economically, however, "this is a dead end," warned Scissors. "If you’re looking to create jobs, the currency change won’t do it. The Chinese have reserved large parts of their market for the state — by rules, by subsidies, by everything you can imagine — and that’s the big cap on US exports, not the

US Treasury Secretary Timothy Geithner said on Saturday he was delaying an April 15 report on whether China manipulates its currency but pledged to press for a more flexible Chinese currency policy. The decision follows Thursday’s announcement in Beijing that Chinese President Hu Jintao will attend a nuclear security summit meeting in Washington April 12-13 and seems to be a move to keep tensions over currency in check. The Obama administration seeks broad global support for measures to curb Iran’s nuclear ambitions, making it an inconvenient time to risk inflaming the dispute over China’s currency policy. Analysts said it would have been a slap in the face to Beijing if Washington had labelled China a currency manipulator days after Hu’s visit.

Geithner said he will use upcoming meetings of the Group of 20 and a US-China economic summit in Beijing in May to try to get China to budge. "I believe these meetings are the best avenue for advancing US interests at this time," Geithner said in a statement issued at midday on the Easter holiday weekend. Treasury gave no indication when it will actually release the report. The US Business and Industry Council, a trade group, said the administration apparently would delay the release of the report until after the G20 summit meeting in June. As a result, "for three more months, more American factories will close or cut back production and more of their employees will lose their jobs" because unilateral US tariffs are needed to combat "predatory trade practices."